Will Affirm's Smart Underwriting Shift Redefine BNPL Risk?

Core Insights - Affirm Holdings, Inc. (AFRM) has upgraded its credit risk evaluation by incorporating real-time financial signals into its underwriting process, enhancing the accuracy of credit assessments [1][9] - The new method is currently available for Affirm Card users and will soon be accessible to a broader audience who opt to link their banking data [2] - This approach allows Affirm to assess creditworthiness based on current financial health rather than outdated credit histories, potentially increasing consumer purchasing power [4] Group 1: Affirm's New Underwriting Process - Affirm's upgraded underwriting now includes real-time bank account balances and cash flow trends, moving away from static credit reports [1][9] - The new system aligns credit decisions with real-life financial situations, improving risk assessment and promoting responsible lending [3] - Early results indicate that this richer view of consumer finances can significantly enhance purchasing power [4] Group 2: Market Position and Performance - The upgrade is expected to improve Affirm's credit quality by reducing default risk and expanding its consumer base, leading to increased approvals and revenue growth [5] - Affirm's Gross Merchandise Value rose 42% year over year in Q1 of fiscal 2026, reaching $10.8 billion [5] - Affirm's shares have increased by 25.2% over the past year, outperforming the broader industry and the S&P 500 Index [7] Group 3: Competitive Landscape - Competitors like PayPal and Block, Inc. are also expanding their BNPL services, with PayPal's total payment volume increasing by 8% to $458.1 billion and Block's BNPL gross merchandise volume climbing 17% to $9.7 billion [6] - The competition in the digital consumer lending space is intensifying, highlighting the need for innovative approaches like Affirm's [6] Group 4: Valuation and Earnings Estimates - Affirm's forward price-to-earnings ratio stands at 55.42X, significantly higher than the industry average of 31.72X, indicating a premium valuation [11] - The Zacks Consensus Estimate predicts a 560% surge in Affirm's fiscal 2026 earnings year over year, followed by a 56.8% increase in the subsequent year [11]